17-Nov-10 News -- Anger at Germany boils over

[John]

17-Nov-10 News -- Anger at Germany boils over

Revulsion of the bubble

** 17-Nov-10 News -- Anger at Germany boils over
** http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e101117#e101117

[vincecate]

I agree with "revulsion of the bubble". This video "Quantitative Easing Explained" has been popping up on many of the sites I read and many of my facebook friends. It has clearly "gone viral". It is probably part symptom and part cause of this change in attitude:
http://www.youtube.com/watch?v=PTUY16CkS-k
My own similar theme video is not going viral, but here it is anyway:
http://www.youtube.com/watch?v=u2VbJttAJJk

If Treasury bond prices continue to fall, as they have in the last week, then it would be signaling a strong deflationary trend. It would indicate that the dollary currency is strengthening, as investors more money out of Treasuries and into other dollar-denominated assets. Thus, in the past week, we've seen the dollar strength and, along with it, decreases of prices of commodities, including gold.

If Higgenbotham is correct, then this is a time of great danger for investors, since the stock market may be headed for a major correction or a crash.

I agree that this is a very dangerous time. I would not want to be long bonds or stocks now and even gold can well go down in this.

I think the dollar strength is because of Euro weakness and another "flight to safety of the dollar." More PIGS trouble.

http://gonzalolira.blogspot.com/2010/11 ... -than.html

Selling of Treasuries and raising interest rates show fear of inflation, not deflation. I think that 4.3% for 30 year bonds is still far too low an interest rate. I think this trend has a long way to go (bond prices down and interest rates up).

[mannfm11]

I don't believe Higgy is correct. For one, the last time Bernanke bought bonds, the rates went up not down. This is simple if they still taught the basics of finance instead of the master degree in lying and stealing. Capital is not put out on supply and demand, but risk and return. QE is seen as inflationary and an immediate devaluation of the dollar. Being so, the rates have to rise. The market would set this price regardless of how badly Bernanke wanted to loan against the debt

In order to get out of the dollar, people have to sell bonds. If they borrowed some other currency to buy the bonds and the dollar turned, they also would have to sell the bonds. If someone is selling the bonds, the purchasing party has to buy them and the use of cash is zero. The reason falling bond prices would be deflationary is that falling asset prices are deflationary. There is a huge position in US debt and a 10% haircut in the bond portfolio is like a 5% loss in the stock market, except it goes up the chain of non-governmental securities as well. There has been a shift in risk parameters the past week and I have seen charts of municipal bonds funds literally collapse. By putting interest rates at zero, Bernanke is destroying the capacity to spend of the well to do retired Americans. The dollar is rallying because there is a scramble for dollars and I believe because the market has began to wonder if bernanke is actually going through with what the Fed proposed. I think he upset the apple cart, which is what I have thought would happen all along, that he would be forced to stop by outside powers.

[shoshin]

John (and others, please), if bonds are due for a crash, including US Treasuries, where should we go?...if you say "cash," that means money market funds for us investors using Fidelity, etc....and those can be losers too...Fidelity puts you into a municipal bond fund in their brokerage accounts, and that's really risky, from my point of view....help!

[vincecate]

John (and others, please), if bonds are due for a crash, including US Treasuries, where should we go?...if you say "cash," that means money market funds for us investors using Fidelity, etc....and those can be losers too...Fidelity puts you into a municipal bond fund in their brokerage accounts, and that's really risky, from my point of view....help!

Odds are it is illegal for me to offer investment advice in your country, so I am specifically NOT doing that.

Some people recommend "Food, Guns, Farm Land, Barb Wire".

If fuel prices are headed up, an electric car might makes sense.

If you have high electric bills, you might get solar panels.

Investing in starting up a company of your own that could do well after a currency collapse might make sense.

Gold and silver are another option.

I think we are headed for very unusual times. Out-of-the-box thinking is more important than ever.

[Higgenbotham]

If Treasury bond prices continue to fall, as they have in the last week, then it would be signaling a strong deflationary trend. It would indicate that the dollary currency is strengthening, as investors more money out of Treasuries and into other dollar-denominated assets. Thus, in the past week, we've seen the dollar strength and, along with it, decreases of prices of commodities, including gold.

If Higgenbotham is correct, then this is a time of great danger for investors, since the stock market may be headed for a major correction or a crash.

Selling of Treasuries and raising interest rates show fear of inflation, not deflation. I think that 4.3% for 30 year bonds is still far too low an interest rate. I think this trend has a long way to go (bond prices down and interest rates up).

I don't believe Higgy is correct. For one, the last time Bernanke bought bonds, the rates went up not down. This is simple if they still taught the basics of finance instead of the master degree in lying and stealing. Capital is not put out on supply and demand, but risk and return. QE is seen as inflationary and an immediate devaluation of the dollar. Being so, the rates have to rise. The market would set this price regardless of how badly Bernanke wanted to loan against the debt.

John has pretty accurately stated my conclusion. I think I understand the counters - rising 30 year treasury rates are a signal that long term inflation is coming and therefore investors need to demand a higher rate of interest on the long bond. In one of the posts yesterday, I mentioned that the action in the past 2 weeks in the 30 year treasury bond, gold/silver, and the dollar are indicating strong deflation to me. Having said that, I would need to show that rising long rates are correlating with rising CDS rates. Also, one of the academic number crunchers Vince referred to has stated that mature economies don't default on their debt, they inflate it away and he comes to that conclusion through studying the financial follies of the past 8 centuries. The point I might make regarding that is, according to a very long term chart I have of the 10 year treasury note, there was a spike in the yield on the 10 year treasury from about 3% to about 4.3% in late 1931/early 1932. That spike occurring at that time would not be due to inflation fears. If the US were in the same fiscal position as today, the US could very well have defaulted during that time period. It could still be argued, though, that the US was not a mature economy at that point and therefore that spike in interest rates cannot be considered equivalent.

It seems in either case, stocks will get hit, so if the stock market takes a big hit those using the deflation explanation can't necessarily claim they are right. If inflation is coming, we should see a big difference in the behavior of real estate, especially farmland, with farmland prices continuing to increase. I would note that John Paulson and Michael Burry, who both made huge bets against the mortgage bubble, are positive on real estate/farmland. I am not for many reasons. For example, a population reduction will decrease the demand for real estate and I don't think things like that are on their radar. I also believe they are buying gold. If inflation is coming, my guess is that gold will rise more than if there is deflation and default, but gold prices can still rise in either event. In the case of a coming deflation/default, I would expect to see very strong swings in gold and especially silver, which is what we are starting to see this year (or maybe 2008). We haven't seen enough to say this isn't just a hiccup though.

It could be that if this "revulsion of the bubble" continues and Bernanke is booted out, that the damage is already done and inflation is still coming. I believe many hold that viewpoint. I still disagree because what Bernanke has done will likely only go so far as to clean up part of the mortage mess.

[John]

Something I just heard on Bloomberg TV:

Five years ago, when someone refinanced their home, they would
take back $100,000 in cash and use the cash to buy a car or
remodel their kitchen.

Today, when someone refinances in order to take advantage of the
recent low interest rates, they've had to give money back to the
bank, since their homes were underwater.

Lower interest rates are supposed to cause people to leverage up --
borrow money and spend it. But today the opposite is happening: Lower
interest rates are causing people to deleverage.

John

[Higgenbotham]

Having said that, I would need to show that rising long rates are correlating with rising CDS rates.

I'm not sure, but I think these are the CDS rates on US Treasuries. Bloomberg labels all the other countries they have quotes for, but not the US.

http://www.bloomberg.com/apps/quote?ticker=CUST1U5:IND

[John]

Having said that, I would need to show that rising long rates are correlating with rising CDS rates.

I'm not sure, but I think these are the CDS rates on US Treasuries.
Bloomberg labels all the other countries they have quotes for, but not
the US.

http://www.bloomberg.com/apps/quote?ticker=CUST1U5:IND

Yesterday on Bloomberg TV, they posted some charts that said that CDS
rates on US treasuries were higher than some corporate bond CDS prices
-- I think Macdonald's was mentioned. Unfortunately, I had a power
failure, so I don't have the screen shots, which I'd love to have.

John

[vincecate]

The point I might make regarding that is, according to a very long term chart I have of the 10 year treasury note, there was a spike in the yield on the 10 year treasury from about 3% to about 4.3% in late 1931/early 1932. That spike occurring at that time would not be due to inflation fears.

There were at least some people who during the 1932 campaign expected FDR to devalue the dollar or go off the gold standard if he got in. England had gone off already and gold was coming out of the Federal Reserve System which only had enough gold to pay off at best 40% of the people with paper money. As I recall FDR denied both during the campaign and did both soon after getting in office. Dollar went from $20/oz to $35/oz of gold. Anyway, there was some inflation fear in 1932 and it was well founded.

I believe that if the US had not made it illegal for citizens to own gold we would have seen the Federal Reserve System collapse as it could not really back all the paper dollars it had issued. Again, the law was it only needed to have 40% backing, so the Fed was issuing 2.5 paper dollars for ever dollars worth of gold it held. This was the source of the money expansion in the 1920s and the cause of the money contraction when people took their gold out in the early 30s. If the Fed had failed, we would have seen the paper money become worthless, which is hyperinflation. So I think that only by breaking "rule of law" and taking everyone's gold were they able to avoid hyperinflation in the 1930s.

Update to show the Ponzi Gold Standard with only 40% backing. Worked as long as more gold was coming in but fails when gold is going out. From the law for the Fed in the following URL, "reserves in gold of not less than forty per centum against its Federal reserve notes in actual circulation".

http://www.historycentral.com/documents ... serve.html